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tax treatment of opt-out incentives


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I am a former employee of a public university of Illinois, now receiving retirement benefits. Ordinarily that would include health insurance benefits, but I took the option to opt out of receiving that benefit in exchange for a monthly cash incentive.

This money is subject to Illinois and federal income tax, which suggests to me that it is treated as wages and salaries. I wouldn't especially mind paying the income tax, except that I live in Texas (which has no state income tax) and now find myself having to file Illinois income taxes, which is a paperwork headache. It would be very helpful if I could divert this "salary" into a 403b or similar plan, as I did while I was employed. (The opt-out incentive will disappear when I turn 65 in a few years, at which time I will want to start cashing in those very 403b and 457 accounts.)

I am still trying to track down who in Illinois has the authority to tell me if this can be done or not, but I would like to find out whether it is at least within the framework of IRS rulings to do so, and if so, whether other benefits plans make this kind of arrangement possible. (That would give me some ammunition if I try to request that such a program be created in the Illinois system.)

So ... is it considered normal to treat health insurance opt-out incentives for retirees as income that can be placed pre-tax in a retirement plan?


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I'm not an expert on government plans. In fact I don't work with them at all. However, what you are describing does not sound like wages for services rendered. It would be extremely unlikely that you would be able to defer them in to a 403(b) or 457 plan.

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